Tuesday, February 23, 2016

Robinhood: Democratizing the Financial Markets

Shortly after arriving in New York City to pursue their dreams of building software for the world's largest financial institutions, Vladimir Tenev and Baiju Bhatt, began to become skeptical of the state of our financial markets. Tenev and Bhatt started working in New York as computer engineers, developing sophisticated trading platforms for major financial institutions. Through their work, they realized that these financial institutions and electronic trading firms were able to make trades in the marketplace at virtually no cost, while the individual investor (you, me, mom, dad, and your grandparents), through their investments with brokerage houses such as Charles Schawb, Fidelity, TD Ameritrade, were forced to pay a transaction fee of up to $10 for every trade they executed (See chart below for comparison of companies). This $10 fee may not seem too heavy, but when an individual investor is making upwards of 100 trades per year, this $10 adds up rather quickly. Furthermore, since small investors are usually investing smaller sums of money, this $10 transaction fee quickly cuts into your overall return. For Tenev and Bhatt, the solution was simple; they decided to create their own company and trading platform with no transaction fees for the individual investor.

Tenev and Bhatts' company, Robinhood, was created in 2013 and targeted young investors, mostly millennials, that planned on investing in simple stocks and ETFs (exchange traded funds), using a small amount of initial capital. Robinhood provides a simple, focused, and understandable platform to the novice investor that allows all users to make as many commission-free trades as they wish. Tenev and Bhatt are able to offer a free platform to their users because of their innovative trading software that allows Robinhood to execute trades at a very low cost. Their software is effective due to their creative engineering team which has created their simple and cost effective platform in-house.

The process to found Robinhood began in 2011 when both Tenev and Bhatt worked in the New York City financial markets. During this time is when they started to first understand the complexity and sophistication of the markets, which they believed had led to Wall Street insiders having tools and resources not possessed by those outside the "system". To counter the Wall Street insiders, Tenev and Bhatt set out to create something "meaningful and something that empowered consumers." They first had to solve the problem regarding how to provide and create a technology that was previously only available to the wealthy and give it to everyone. Using their Wall Street insight, adept engineering ability, and drive to democratize the financial markets, Tenev and Bhatt, along with a team of fellow engineers, created the software and trading platform that is now known as Robinhood. As of February 2016, over $600 million worth of money has been traded through Robinhood, and Robinhood has saved their customers over $12 million in transaction fees. Also, the company has raised over $66 million in funding from venture capitalists hoping to ride the Robinhood train to riches.

Similar to many creatives before their time, Tenev and Bhatt were faced with a problem they believe needed to be solved. Howard Gardner, a writer who specializes in the field of creativity, believes creative people are those who are repeatedly solving problems and one who "define(s) new questions in a domain in a way that is initially considered novel but that ultimately becomes accepted in a particular cultural setting." At the time being, Robinhood is doing exactly that; they are defining a new normal for personal investing by offering a product and business model that has always been considered novel in the realm of personal finance: free commission and free trading. Tenev and Bhatt have a different view of personal finance then today's norm. In ten years, these innovative creators believe people will think its crazy they ever used to have to pay to trade stocks.

1 comment:

I don't know what's more impressive about these two individuals; the fact that they were the masterminds of Robinhood or that helped develop the software themselves. They rode the millennial train of helping the average and poor man and managed to do it without taking away from the rich man. The best part of this software is that it has been successful. Saving the average Joe $12 million dollars is extraordinary. These guys deserve some serious credit.